General Mills Q3 2023 Prepared Remarks Earnings Call Transcript

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March 23, 2023

There are 3 speakers on the call.

Operator

Good morning. This is Jeff Siemon, Vice President of Investor Relations. Thank you for listening to General Mills' prepared remarks for our fiscal 2023 Q3 earnings. Later this morning, we will hold a Separate live question and answer session on today's results, which you can hear via webcast on our Investor Relations website. Joining me for this morning's presentation are Jeff Harmening, our Chairman and CEO and Kofi Bruce, our CFO.

Operator

Before I hand things over to them, let me first touch on a few items. On our website, you will find a press release that posted this morning, along with a copy of the presentation and a transcript of these remarks. Please note that today's remarks include forward looking statements that are based on management's current views and assumptions. The second slide in today's presentation lists several factors that could cause our future results to be different than our current estimates. And with that, I will turn it over to Jeff.

Speaker 1

Thank you, Jeff, and good morning, everyone. Let me start by summarizing today's key messages. We delivered broad based top line growth and strong bottom line results in our 3rd quarter, Including continued positive momentum in North America retail and encouraging improvement in each of our other three segments. Our team continues to execute well, and we remain focused on advancing our Accelerate strategy and delivering on our fiscal 2023 priorities By competing effectively, investing for the future and reshaping our portfolio, with stronger and more broad based business momentum, We are once again raising our full year guidance for organic net sales, adjusted operating profit and adjusted diluted earnings per share growth. Slide 5 summarizes our Q3 and year to date financial performance.

Speaker 1

We drove 16% organic net sales growth in the quarter, Once again fueled by strong net price realization in response to significant levels of input cost inflation. Adjusted operating profit was up 20% And adjusted diluted earnings per share was up 17%, each in constant currency. On a year to date basis, We generated double digit growth in organic net sales, adjusted operating profit and adjusted diluted earnings per share. Our growth in Q3 was broad based across our segments, including organic net sales up high single digits in international and up Mid to high teens in North America Foodservice, North America Retail and Pet. On the bottom line, 3 of our 4 segments posted strong double digit or even triple digit operating profit growth, while pet profit was down year on year as we expected, Driven by significant input cost inflation and increased costs related to capacity and service improvements.

Speaker 2

The state

Speaker 1

of the operating environment remains a critical factor for our business. We are pleased with the improvements we have seen in recent months and yet the environment remains challenging and dynamic. We continue to forecast total input cost inflation of approximately 14% to 15% for the full year in fiscal 2023, Including double digit inflation in the second half. Looking beyond this fiscal year, we expect inflation to decelerate but remain above historical averages. Based on our current projections, we are forecasting mid single digit total input cost inflation in fiscal 2024, With labor and conversion costs at our suppliers being key sources of ongoing cost pressure, we will provide an updated inflation forecast along with the rest of our typical guidance commentary during our Q4 earnings call in late June.

Speaker 1

Volume elasticities remain below historical levels Through the 1st three quarters of fiscal 2023, particularly in North America retail, and we do not expect a material change in elasticities for the remainder of fiscal 2023. The supply chain environment continues to improve. Our customer service level reached 90% U. S. Retail by the end of the quarter.

Speaker 1

Despite these improvements, supply disruptions remain well above historic averages And customer service is still notably below our normal range of 98% to 99%. In addition to these factors, we continue to track As we move beyond the period of acute pandemic impact, the most recent change has been in China, where we continue to see a broad trend toward reopening And where consumer traffic in our Haagen Dazs shops is steadily increasing. We anticipate shops traffic will be at or near pre pandemic levels as we move Stepping back, while we are seeing definite improvements, the operating environment remains dynamic. Led by our Accelerate strategy, we are confident in our ability to adapt to continued change and deliver winning results in the months years ahead regardless of the environment. We are continuing to drive our accelerate strategy this year by executing on the three priorities outlined on Slide 8.

Speaker 1

We are competing effectively by boldly building our brands, relentlessly innovating and servicing the business with excellence. We are investing for the future by delivering and SRM to offset inflation, making strategic investments in the business And advancing our ESG commitments. And we are reshaping our portfolio, including closing 3 transactions so far in fiscal 'twenty three Assessing the landscape for additional growth and value enhancing acquisitions or divestitures. Let me share a few highlights of the progress we've made against our priorities so far in fiscal 2023. We're continuing to compete effectively this year, including holding or gaining share And 56% of our priority businesses year to date when adjusted for unusual competitive dynamic in cereal last year And looking at the platform on a 2 year basis.

Speaker 1

And this is on top of our holding or gaining share in roughly 2 thirds of our priority businesses worldwide and each of the past four Our share gains this year span a broad array of platforms in the U. S. And internationally, including cereal, refrigerated dough, Fruit snacks, soup and seasonings. In addition to executing for today, we continue to make strategic investments to strengthen our brands and our competitive advantages for the future. We believe healthy investments in brands is critical for long term growth.

Speaker 1

We have grown our media investment at a 4 compound rate over the past 3 years and we're on track for a strong double digit increase in fiscal 2023. We're putting that investment behind compelling, digitally enabled, high ROI campaigns such as Cheerios Heart Health, 20% more meat news on Blue Buffalo's Wilderness line and our latest global Haagen Dazs campaign. We also continue to invest behind innovation. Over the past 3 years, we've kept up our innovation pressure and our new product retail sales have been 30% higher than the category average. We are continuing that focus with our fiscal 2023 innovation.

Speaker 1

In North America retail, we continue to lead innovation in the cereal category with our latest new Minis versions of Cinnamon Toast Crunch, Reese's Puffs and Trix. In international, we are launching a delicious new Haagen Dazs macaron Ice Cream Line in collaboration with celebrity pastry chef, Pierre Hermez. In foodservice, we continue to And distribution and drive growth on our 2 equivalent grain cup cereal line, including new Honey Cheerios and reduced sugar Trix varieties. And in Pet, we're launching innovation across the Blue Buffalo platform, including Wilderness Premium Blend, a new super premium dry dog food, Our new Blue Buffalo fresh dog food offering we are currently testing in 200 stores in the FDM channel and human inspired treats Products including Blue, Benabars and Nudges On the Go. In addition to investments in brand building and innovation, We're also investing for the future in capabilities that allow us to leverage our scale and create meaningful competitive advantage for General Mills.

Speaker 1

As we shared at CAGNY last month, we're making good progress in building differentiated capabilities such as connected commerce, Strategic revenue management and supply chain digitization that will help us accelerate profitable growth. To enable this, we've been investing heavily in recent years To build a world class digital and technology capability that provides the foundation for these enterprise initiatives. And we're significantly stepping up this investment again fiscal 2023 to better capture insights and unlock new growth and efficiency opportunities throughout our business. Another way we are investing for the future is through our commitment to standing for good. We continue to make progress against our 10 key ESG commitments.

Speaker 1

And because yesterday was World Water Day, I'd like to provide a brief update on our commitment to championing the regeneration of water resources In our priority watersheds, with 99% of General Mills water impact outside of our owned operations, We focus our efforts on protecting our ingredient sourcing locations from water risk. We believe advancing regenerative agriculture is our primary lever To protect the most important and at risk watersheds in our global value chain, in fact, the same activities that improve soil health Also improve water outcomes. In addition to our regenerative agriculture efforts, we support water stewardship projects in 14 priority watersheds, Partnering with a variety of nonprofits, governments and businesses to improve the management of this essential resource. One example of work underway is in California's San Joaquin Valley watershed. We source 100% of our almonds from California, a state facing Over the last decade, we proudly supported Sustainable Conservation, a non profit solving water challenges in California.

Speaker 1

Sustainable conservation educates farmers and coordinates with government water regulators to release water upstream and temporarily flood farms during wet years to refill Since December, our partnership has enabled Central Valley farmers to take advantage of recent continue to be pleased with how we're executing our accelerate strategy, strengthening momentum and delivering results in fiscal 'twenty three. Let me now turn it over to Kofi to provide more details on our Q3 results and updated outlook.

Speaker 2

Thanks, Jeff, and hello, everyone. Our Q3 financial results are summarized on Slide 15. Reported net sales of $5,100,000,000 were up 13% and organic net sales grew 16% in the quarter, reflecting Continued positive price mix in response to significant input cost inflation. Adjusted operating profit of $807,000,000 was up 20% In constant currency, with benefits from price mix partially offset by higher input costs and higher SG and A expenses, Including a strong double digit increase in media investment. Adjusted diluted earnings per share totaled $0.97 in the quarter And we're up 17% in constant currency.

Speaker 2

Slide 16 summarizes the components of our net sales growth in the quarter. Organic net sales were up 16%, primarily driven by positive organic price mix. Organic volume was flat in the quarter, reflecting continued low as well as the comparison against mid single digit organic volume declines a year ago that included acute service issues on our U. S. Refrigerated dough And Hot Snacks Platforms.

Speaker 2

Foreign exchange reduced net sales by 1 point and the net impact of acquisitions and divestitures was a 2 point headwind to 3rd quarter net sales. Now let's turn to our segment results, beginning with North America Retail on Slide 17. Ma'ar continues to perform exceptionally well with our brands delivering for consumers and the businesses executing successfully Amid ongoing volatility in the operating environment, organic net sales grew 18% in the quarter driven by positive price mix. This growth was broad based with double digit net sales growth in U. S.

Speaker 2

Meals and Baking Solutions and U. S. Snacks and high single digit growth in U. S. Morning Foods And Canada in constant currency.

Speaker 2

We continue to compete effectively with 70% of our North America retail priority businesses holding or growing share year to date when adjusting for cereal on a 2 year basis. 3rd quarter constant currency segment operating profit increased 29%, Primarily driven by positive price mix, partially offset by higher input costs and higher SG and A expenses, including a strong double digit increase In Media Investment. While Q3 input cost inflation was up double digits for NAR, we saw some easing in the cost of supply chain disruptions And we exited the quarter with our customer service level in the U. S. At nearly 90%.

Speaker 2

Slide 18 summarizes our Pet segment results. As expected, we saw a nice rebound in top line trends for Pet in Q3, with organic net sales up 14% in the quarter. This included double digit growth in dry dog and cat food and high single digit growth in dog treats. Q3 organic net sales accelerated from our Q2 trend, driven by improved customer service, increased brand building and other commercial activities And a rebuild of retailer inventory levels. While we've seen significant volatility in retailer inventory for Pet over the past two quarters, It was roughly stable on a fiscal year to date basis with organic net sales and all channel retail sales both up high single digits through 9 months.

Speaker 2

On the bottom line, 3rd quarter segment operating profit declined 7%, Driven primarily by double digit input cost inflation, increased costs related to capacity expansion and service improvement And higher SG and A expenses, including a double digit increase in media investment. These headwinds were partially offset by positive price mix, cost savings and higher volume. We remain on track to deliver double digit organic net sales growth for the Pet segment in the second half of fiscal twenty twenty 3, with the back half segment operating profit margin ahead of our Q2 result. Moving on to our North America Foodservice segment results on Slide 19. Organic net sales grew 19% in the quarter, driven primarily by positive price mix.

Speaker 2

Market index pricing on bakery flour was only a 1 point benefit in the quarter. On the bottom line, 3rd quarter segment operating profit more than to $82,000,000 driven by benefits from pricing and improved product mix, partially offset by higher input costs. 3rd quarter international segment results are summarized on Slide 20. Organic net sales were up 8 percent this quarter driven by broad based growth across Europe and Australia, our distributor markets, Brazil and China. With the yogurt divestiture and ice cream recall now behind us, 3rd quarter segment operating profit for international was up 27%, Which represented a sharp improvement from the profit declines we reported in the first half.

Speaker 2

Q3 profit growth was driven primarily by positive price mix And lower SG and A expenses, partially offset by higher input costs and lower volume, including the continued impact of the dough divestitures, Which we will lap by the end of this fiscal year. Slide 21 summarizes our joint venture results in the 3rd quarter. Cereal Partners Worldwide net sales were up 2% in constant currency and Haagen Dazs Japan net sales were up 1%, With both results reflecting favorable price mix, partially offset by lower volume. 3rd quarter combined after tax earnings from joint ventures totaled $13,000,000 compared to $30,000,000 a year ago, driven primarily by higher input Costs and unfavorable non recurring discrete tax items at CPW, partially offset by favorable CPW price mix. Turning to total company margin results on Slide 22.

Speaker 2

Our 3rd quarter adjusted gross margin increased 240 basis points versus last year To 33.8 percent driven by positive price mix and cost savings, partially offset by mid teens input cost inflation And higher other costs of goods sold. We've been pleased with our ongoing margin recovery as our pricing and productivity continue to catch up To the cumulative inflation we've seen over the past 2 years. However, we still have more work to do as our adjusted gross margin over the past 4 quarters It's still roughly 50 basis points below fiscal 2019 levels. Adjusted operating profit margin increased 80 basis points in the quarter to 15.7%, driven by higher adjusted gross margin, partially offset by higher SG and A expenses. Slide 23 summarizes other noteworthy Q3 income statement items.

Speaker 2

Adjusted unallocated corporate increased $89,000,000 in the quarter, primarily reflecting higher compensation and benefits expenses, Corporate charitable contributions and capability investments this year. Net interest expense increased $12,000,000 driven by higher interest rates, partially offset by lower average long term debt balances. The adjusted effective tax rate for the quarter was 21 6% compared to 21% a year ago and average diluted shares outstanding in the quarter were down 2% to 599,000,000 shares, reflecting our net share repurchase activity. Our 9 month fiscal 2023 results are summarized on Slide 24. Net sales of $15,100,000,000 were up 7%, including a 4 point headwind from net divestiture and acquisition activity And at one point, unfavorable foreign currency exchange.

Speaker 2

Organic net sales increased 12%, driven by positive organic price mix, Partially offset by lower organic pound volume, year to date adjusted operating profit of $2,600,000,000 Increased 11% in constant currency and adjusted diluted earnings per share of $3.18 were up 14% in constant currency. Turning to the balance sheet and cash flow on Slide 25. While we drove strong growth in adjusted net earnings in the 1st 9 months Fiscal 2023, our operating cash flow was down from $2,200,000,000 a year ago to $2,000,000,000 this year, Driven primarily by an increase in inventory and higher cash tax payments. Year to date capital investments totaled $351,000,000 We returned nearly $2,000,000,000 in cash to shareholders in the 1st 9 months of the year through dividends and net share repurchases. On Slide 26, you can see our outlook for fiscal 2023.

Speaker 2

Relative to our prior update, we continued to post strong performance in North America retail. We delivered the expected acceleration in our pet top line results and we saw encouraging improvement in operating profit results for North America Foodservice international. With stronger and more broad based business momentum, we have raised our guidance and now expect organic net sales to increase 10% to 11%, Adjusted operating profit to grow 7% to 8% in constant currency and adjusted diluted earnings per share to grow 8% to 9% in constant currency. These profit and EPS ranges include a 3 point net headwind from divestitures and acquisitions and an estimated 1 point headwind from the ice cream recall. Additionally, we continue to expect free cash flow conversion will be at least 90% of adjusted after tax earnings.

Speaker 2

These guidance ranges imply a deceleration in net sales and profit growth in the 4th quarter, driven by a much more challenging comparison in last year's Q4. On a 2 year basis, our guidance assumes our growth in Q4 is generally consistent with Q3. Now let me turn it back to Jeff for some closing remarks.

Speaker 1

Thanks, Kofi. Let me close with a few thoughts. We're advancing our Accelerate strategy and executing well on our fiscal We built on our positive momentum in Q3 and generated broad based growth across our segments. Our brands continue to win with consumers and we plan to sustain this momentum by investing further in brand building, innovation and capabilities that will drive future growth. And we're on track to deliver a strong year having raised guidance yet again this quarter.

Speaker 1

Thank you for your time this morning. This concludes our prepared remarks. I invite you to listen to our live question and answer webcast, which will begin at 8 a. M. Central Time this morning and will be available for replay on our Investor Relations page at generalmills.com.

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